United States v. Paul A. Bilzerian

The indictment charged three fraudulent schemes relating to trades in Cluett. These involved misrepresenting the source of funds used to purchase stock, secretly accumulating stock through nominee, and misrepresenting an "open market" purchase. By agreeing to share any profits and by guaranteeing against any loss, Bilzerian in April and May of 1985 raised $9 million to buy Cluett stock from various individual investors. The funds were transferred to him through a series of trusts set up for that purpose. Defendant was required to disclose purchase of this large block of stock on a form filed with the SEC known as a Schedule 13D. On the 13D, and its amendment, respecting the Cluett purchase, defendant stated that the stock was purchased with "personal funds," and did not disclose that they were raised from other investors with whom he had a profit-sharing and guarantee-against-loss agreement.

Bilzerian also engaged an employee of Jeffries & Company, Inc. (Jeffries), a registered broker-dealer, to accumulate stock on his behalf. Under stock accumulation, a broker-dealer purchases stock in its own account with the understanding that the customer will buy it at a later date at the broker's cost plus interest and commissions. In such a transaction the prearranged sale involves no risk of loss to the broker-dealer, who acts as a nominee for the true purchaser. On May 28, 1985 defendant purchased the accumulated stock without revealing the accumulation arrangement to the SEC. The indictment charged that the agreement was fraudulently designed to delay the reporting requirements of the securities laws.

Bilzerian also agreed to purchase 347,567 shares of Cluett common stock from a group of shareholders in contemplation of making a tender offer for that company, offering between $38 and $40 per share depending on the price of his tender offer. This proposed purchase was made with the understanding that the trade would not settle for 45 days and that defendant would cancel the purchase proposal if a third party offered more for the shares. Although he learned that 66,667 of the shares included in this block were already under his control, defendant advised the shareholder group to proceed with the sale. The offering statement claimed that 347,567 shares were purchased "in an open market transaction." The existence and terms of the privately-negotiated transaction were not disclosed.

The indictment alleged that the Cluett transactions violated Secs. 10(b) and 32 of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. Secs. 78j(b) and 78ff (Count One), and the federal false statements statute, 18 U.S.C. Sec. 1001 (Counts Two, Three, and Four). Defendant was also charged with conspiring to defraud the SEC and to commit specific offenses in violation of 18 U.S.C. Sec. 371 (Count Eight).

In June 1986 defendant raised $8 million from an individual investor for the purpose of purchasing Hammermill stock. These funds were made available to him through a trust upon his agreeing to share any profits from the eventual sale of the stock. Bilzerian turned the funds over to a limited partnership--of which he was the general partner--and the partnership made the tender offer for Hammermill. The disclosure relating to the stock purchase and tender offer stated that defendant's contribution to the partnership was from "personal funds."

Once again, defendant arranged to have an employee of Jeffries accumulate Hammermill stock on his behalf. On July 21, 1986 he purchased 551,000 accumulated shares of Hammermill. Although he was required to disclose the acquisition as of July 7, he failed to file until July 25, and at that time did not disclose the accumulation agreement. The Hammermill transactions were alleged to violate 15 U.S.C. Secs. 78j(b) and 78ff (Count Five), 18 U.S.C. Sec. 1001 (Counts Six and Seven) and 18 U.S.C. Sec. 371 (Count Eight).

Defendant also engaged in "stock parking" transactions in shares of Robertson and Armco. "Parking" refers to a transaction in which a broker-dealer buys stock from a customer with the understanding that the customer will buy the stock back at a later date for the purchase price plus interest and commissions. As with "accumulation" there is no market risk to the broker-dealer who is the owner of the shares in name only.

Bilzerian arranged to park 58,000 shares of Robertson with Jeffries for 30 days. Although he assured Jeffries he would repurchase the stock, the stock price fell substantially in the interim and he refused to honor his commitment. As a result, Jeffries incurred a $250,000 loss. Defendant compensated Jeffries in part for this loss by generating approximately $125,000 in commissions for the broker. He paid the remaining $125,000 with the understanding that it would be refunded when an additional $125,000 of commissions was generated. Jeffries sent Bilzerian a false invoice in the amount of $125,000 for "financial services" that were never performed, and the latter deducted the payment on a 1985 tax return. When additional commissions were generated in 1986 he sent Jeffries fictitious invoices for "consulting services" seeking a refund of the $125,000.

Defendant also arranged to park 306,600 shares of Armco with Jeffries for a 30-day period beginning September 2, 1986. In addition, Jeffries agreed to accumulate Armco stock in its own account on defendant's behalf and then sell him the accumulated stock when he repurchased the 306,600 shares. On October 2 defendant purchased 818,900 shares of Armco from Jeffries at the prevailing market price of $8 per share. Although the broker realized a $575,000 gain on the sale, the profits belonged to defendant by virtue of the stock parking and accumulation agreements. Defendant sent his broker an invoice for fictitious "consulting services" in order to account for the profits he realized on the trade.

For his part in the Robertson and Armco trades, Bilzerian was charged with conspiring to defraud the SEC and the IRS and to commit specific offenses including violations of 15 U.S.C. Secs. 78g, 78q, and 78ff (1988) and 18 U.S.C. Sec. 1001, in violation of 18 U.S.C. Sec. 371 (Count Nine).

At trial defendant argued that he did not intend to violate the securities laws, but believed the financing structure of the transactions, utilizing trusts to borrow funds, would allow him legally to avoid disclosure regarding other investors, and that describing the source of his funds as "personal" was lawful. A motion was made in limine seeking a ruling permitting him to testify regarding his belief in the lawfulness of describing the source of his funds as "personal" without being subjected to cross-examination on communications he had with his attorney on this subject, discussions ordinarily protected by the attorney-client privilege.

Declining to rule on the issue in the abstract, Judge Ward stated that if defendant testified regarding his good faith regarding the legality of the disclosure, it would open the door to cross-examination with respect to the basis for his belief, and that such cross-examination would allow inquiry into communications with his attorney. Thus, defendant did not testify regarding his good faith, and now claims the trial court's ruling prejudiced his defense and infringed his constitutional right to deny each element of the charge against him. Error is also claimed in several evidentiary rulings made at trial, including the district court's decision to admit expert testimony by a government witness on the legal requirements of the federal securities laws, while excluding similar expert testimony offered by the defense. Additionally, defendant challenges the admission into evidence of a $4 million tax return error on an unrelated personal tax return.

Beyond the challenge that his right to a fair trial was prejudiced, Bilzerian asserts fundamental errors in the prosecution of this case. Specifically, he contends that prosecution under the general false statements statute was improper in light of the existence of more specific securities laws covering the same conduct, that any misstatements or omissions made on securities filings were immaterial, and that he was improperly charged under the "defraud" clause of the federal conspiracy statute rather than the more specific "offense" clause.

Defendant contends the testimony he sought to introduce regarding his good faith attempt to comply with the securities laws would not have disclosed the content or even the existence of any privileged communications or asserted a reliance on counsel defense. As such, he continues, the attorney-client privilege would not be waived by his testimony and, therefore, the trial court committed reversible error when it denied his motion in limine seeking to protect the privilege. He alleges that this ruling, together with similar rulings made during the course of the trial, prevented him from refuting the charge that he acted with criminal intent--a central element of the government's case--and that his constitutional right to "the fullest opportunity to meet the accusation against him.... [and] to deny all the elements of the case against him," Walder v. United States, 347 U.S. 62, 65, 74 S.Ct. 354, 356, 98 L.Ed. 503 (1954), was thereby encroached upon.

Professor Wigmore tells us that the attorney-client privilege, dating back to the 1600s, is the most ancient of the confidential communication privileges. Originally, it was the attorney's privilege; today, it is recognized as the client's. See 8 J. Wigmore, Evidence Sec. 2290, at 542-44 (McNaughton rev.1961). It may have arisen--with the advent of testimonial compulsion in Elizabethan England--as a judicial extension of the right of individuals to avoid self-incrimination. Id. at 543-44; Note, Developments in the Law: Privileged Communications, 98 Harv.L.Rev. 1450, 1502 (1985).

The purposes for the privilege are twofold: first, it assures that a person seeking legal advice may do so safely. Its existence therefore encourages the full and truthful revelation by the client of all the facts in his possession. Second, no attorney can represent a client effectively unless the client discloses fully all the facts in his possession. Thus, the privilege "recognizes that sound legal advice or advocacy serves public ends and that such advice or advocacy depends upon the lawyer's being fully informed by the client." Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S.Ct. 677, 682, 66 L.Ed.2d 584 (1981). The fundamental purpose of the privilege is to " 'encourage full and frank communication between attorneys and their clients.' " United States v. Zolin, 491 U.S. 554, 109 S.Ct. 2619, 2626, 105 L.Ed.2d 469 (1989) (quoting Upjohn, 449 U.S. at 389, 101 S.Ct. at 682).

Although the underlying rationale for the privilege has changed over time, it has retained its importance in the common law tradition. Id. 109 S.Ct. at 2625-26; see United States v. Schwimmer, 892 F.2d 237, 243 (2d Cir.1989). The potential societal benefit may be great in cases like the one at bar, where defendant seeks legal advice in order to act within the confines of highly complex federal securities laws. Often the importance of the interests promoted by the privilege justify the exclusion of otherwise relevant evidence. See McCormick on Evidence Sec. 72 at 152 (E. Cleary 2d ed. 1972).

However, the attorney-client privilege cannot at once be used as a shield and a sword. See In re von Bulow, 828 F.2d 94, 103 (2d Cir.1987); see also Clark v. United States, 289 U.S. 1, 15, 53 S.Ct. 465, 469, 77 L.Ed. 993 (1933) ("The privilege takes flight if the relation is abused."). A defendant may not use the privilege to prejudice his opponent's case or to disclose some selected communications for self-serving purposes. See von Bulow, 828 F.2d at 101-02. Thus, the privilege may implicitly be waived when defendant asserts a claim that in fairness requires examination of protected communications. See United States v. Exxon Corp., 94 F.R.D. 246, 249 (D.D.C.1981) (claim of good faith reliance on governmental representations waived attorney-client privilege); Hearn v. Rhay, 68 F.R.D. 574, 581 (E.D.Wash.1975) (assertion of qualified immunity defense waived attorney-client privilege). This waiver principle is applicable here for Bilzerian's testimony that he thought his actions were legal would have put his knowledge of the law and the basis for his understanding of what the law required in issue. His conversations with counsel regarding the legality of his schemes would have been directly relevant in determining the extent of his knowledge and, as a result, his intent.

In support of his argument that asserting a good faith defense does not waive the attorney-client privilege, Bilzerian points to United States v. White, 887 F.2d 267 (D.C.Cir.1989). In that case attorney-client communications were admitted at trial over defense counsel's objection, in part because defendant's assertion of lack of intent was deemed to have waived the privilege. In reversing White's conviction the court stated: "[a] rule thus forfeiting the privilege upon denial of mens rea would deter individuals from consulting with their lawyers to ascertain the legality of contemplated actions...." 887 F.2d at 270. Because intent is an element of the case that the government must prove, the court continued, waiver of the attorney-client privilege based in denial of intent "would cut short both the privilege and the right." Id.

Denial of an essential element of the crime charged--here criminal intent--is a constitutional right to be carefully safeguarded. But White is distinguishable because the district court's ruling in the instant case did not prevent defendant from denying criminal intent; the district judge merely said that Bilzerian's own testimony as to his good faith would open the door to cross-examination, possibly including inquiry into otherwise privileged communications with his attorney. Defendant was free to deny criminal intent either without asserting good faith or to argue his good faith defense by means of defense counsel's opening and closing statements and by his examination of witnesses.

Another important distinction between White and the case at bar is that in the former the privileged communications were actually admitted at trial, allowing the appellate court an opportunity to examine whether defendant's case was or was not prejudiced. See White, 887 F.2d at 272. Because defendant did not testify as to his good faith, the privileged communications were not introduced at trial. Hence, the trial court's ruling and our review of defendant's claims lack a specific factual context within which to determine if the defense was actually prejudiced. See Luce v. United States, 469 U.S. 38, 41, 105 S.Ct. 460, 463, 83 L.Ed.2d 443 (1984) ("A reviewing court is handicapped in any effort to rule on subtle evidentiary questions outside a factual context."). The district court took great pains to point out that application of the privilege would hinge on the testimony elicited on direct examination. In response to defense counsel's statement that "[t]he government presumably then would be able to call the attorney because the privilege is gone," the court stated:

I am not going to go to that point. It may be that the government would be bound by the answer of the witness but I am not going to get to that point because I don't think I have to at this juncture. I don't know how this is going to play out. Until I do, I think it is inappropriate for me to give any advisory opinion.

In effect, defendant was seeking an advisory ruling in advance, assuring that the attorney-client privilege would not be waived regardless of what developed in his direct testimony. In order for the privilege to operate effectively defendants must be able to rely on its protection, see In re von Bulow, 828 F.2d at 100 ("An uncertain privilege--or one which purports to be certain, but results in widely varying applications by the courts--is little better than no privilege."), but courts cannot sanction the use of the privilege to prevent effective cross-examination on matters reasonably related to those introduced in direct examination. Cf. McGautha v. California, 402 U.S. 183, 215-17, 91 S.Ct. 1454, 1471-72, 28 L.Ed.2d 711 (1971) (defendant testifying on punishment issue in a bifurcated proceeding could not assert privilege against self-incrimination on issue of guilt); Walder, 347 U.S. at 63-65, 74 S.Ct. at 355-56 (defendant who lied on witness stand not permitted to use exclusionary rule as shield against impeachment).

A district court's finding that a defendant has waived the attorney-client privilege is reviewed under the abuse of discretion standard. See In re von Bulow, 828 F.2d at 101. Here the district court's ruling did not prevent the defense from urging lack of intent. Accordingly, the refusal to grant Bilzerian blanket protection from an implied waiver of the attorney-client privilege was not an abuse of discretion.

Bilzerian asserts the court ruled that even his own testimony regarding the steps he took to change the structure of his financing arrangements would waive the privilege. He argues that testimony about underlying facts cannot waive the privilege, because the attorney-client privilege does not extend to underlying facts. See Upjohn, 449 U.S. at 395-96, 101 S.Ct. at 685-86. To the contrary, the trial court held only that Bilzerian's testimony about the changes would open the door on cross-examination to inquiry into Bilzerian's reasons for making the changes, because the topic would necessarily involve Bilzerian's state of mind. Even defendant's trial counsel knew the testimony about the changes would be inextricably intertwined with Bilzerian's assertion of good faith. Counsel said: "Mr. Bilzerian's response would be in substance that he directed these changes to be made so that--in order to enable himself to be able to report as personal funds on the 13D the funds that he received from the trust that he would not have to disclose any of the investors' names and that he thought that doing that, that he believed that was appropriate and proper". The trial court's ruling left defendant free to testify without getting into his state of mind, but correctly held that if he asserted his good faith, the jury would be entitled to know the basis of his understanding that his actions were legal.

Defendant next contends that his ability to defend himself was unfairly prejudiced by the trial court's rulings on the admissability of expert testimony. The court erred, he says in allowing Professor John C. Coffee, a government expert witness, to testify regarding the requirements of Schedule 13D concerning disclosure of the source of funds and arrangements and understandings with others.

Particularly in complex cases involving the securities industry, expert testimony may help a jury understand unfamiliar terms and concepts. Its use must be carefully circumscribed to assure that the expert does not usurp either the role of the trial judge in instructing the jury as to the applicable law or the role of the jury in applying that law to the facts before it. See United States v. Scop, 846 F.2d 135, 139-40, modified, 856 F.2d 5 (2d Cir.1988); Marx & Co., Inc. v. Diners' Club, Inc., 550 F.2d 505, 510-11 (2d Cir.), cert. denied, 434 U.S. 861, 98 S.Ct. 188, 54 L.Ed.2d 134 (1977).

As a general rule an expert's testimony on issues of law is inadmissable. See generally, Note, Expert Legal Testimony, 97 Harv.L.Rev. 797 (1984). The Marx and Scop cases distinguish between factual conclusions that may be included in an expert's testimony--though they embrace an ultimate issue to be decided by the jury--and opinions embodying legal conclusions that encroach upon the court's duty to instruct on the law. See Scop, 846 F.2d at 142; Marx, 550 F.2d at 512. In Marx, it was held that an expert's legal opinion on the meaning of certain contract terms was outside the witness' area of expertise and was also an invasion of the court's authority to instruct the jury on the applicable law. 550 F.2d at 509-510. In Scop, an expert's repeated statements that defendants' conduct established a manipulative and fraudulent scheme within the meaning of the securities laws exceeded the permissible scope of opinion testimony. 846 F.2d at 139. These cases establish that although an expert may opine on an issue of fact within the jury's province, he may not give testimony stating ultimate legal conclusions based on those facts.

Unlike Scop and Marx, the government's expert in the present case did not give his opinion as to whether Bilzerian's actions violated the securities laws. As the government's first witness, much of Professor Coffee's testimony was general background on federal securities regulation and the filing requirements of Schedule 13D, which he presented by referring to a blank form. Although Professor Coffee did answer a few questions based on hypothetical facts, the use of hypotheticals was first introduced by the defense on cross examination. The mere use of hypotheticals does not usurp the jury's function of applying the law to the facts of the case. See Scop, 846 F.2d at 143. Further, since the expert's general testimony was not objected to at trial, the issue was waived. See United States v. Heinemann, 801 F.2d 86, 96 (2d Cir.1986), cert. denied, 479 U.S. 1094, 107 S.Ct. 1308, 94 L.Ed.2d 163 (1987).

Following a specific objection that Professor Coffee's testimony constituted an impermissible legal instruction, Judge Ward limited his testimony regarding 13D's requirements by asking the jury to read specified instructions on the blank Schedule 13D and to ask Professor Coffee to clarify any ambiguity in the instructions. In addition, the trial judge gave a limiting instruction indicating that the expert's testimony was simply background information:

Professor Coffee is here to furnish you with background concerning the meaning of terms, the procedures which are followed and his opinion as to the reason for these procedures. He is not here to give his opinion as to what the law requires. That is a matter which must be presented to you by the court.

With respect to the admission or exclusion of expert evidence, we defer to the trial judge's broad discretion unless his decision is clearly wrong. See Salem v. United States Lines, 370 U.S. 31, 35, 82 S.Ct. 1119, 1122, 8 L.Ed.2d 313 (1962); United States v. Daly, 842 F.2d 1380, 1387 (2d Cir.), cert. denied, 488 U.S. 821, 109 S.Ct. 66, 102 L.Ed.2d 43 (1988). In view of the general background nature of the unobjected to testimony and the court's limiting instruction to defense counsel, we see no abuse of discretion in admitting the expert testimony.

Bilzerian argues further that the trial court erred in limiting the testimony of his expert witness, Lee B. Spencer, Jr., former director of the SEC's Division of Corporate Finance. The defense sought to elicit that the phrase "personal funds," as generally understood in the securities industry, includes funds derived from loans of the type received by defendant. It hoped to demonstrate with this evidence defendant's good faith in completing the disclosure form. Judge Ward excluded this proof because it related directly to the issue of whether Bilzerian's actual 13D disclosures complied with the legal requirements. Thus, the expert testimony would have constituted an impermissible instruction on governing law. Defense counsel was informed that it would have an opportunity to submit proposed jury instructions regarding the scope of "personal funds."

Although testimony concerning the ordinary practices in the securities industry may be received to enable the jury to evaluate a defendant's conduct against the standards of accepted practice, Marx, 550 F.2d at 509, testimony encompassing an ultimate legal conclusion based upon the facts of the case is not admissable, and may not be made so simply because it is presented in terms of industry practice. Several hypothetical questions posed to Mr. Spencer included the particular facts alleged in the indictment, blurring the line between testimony regarding industry practice and an opinion on the legality of defendant's conduct. It does not appear that the trial court's ruling was clearly wrong or that the limits placed on Spencer's earlier testimony prejudiced the defense.

C. Admission of Evidence Regarding Bilzerian's 1986 Personal

Defendant next alleges that the district court abused its discretion in admitting evidence of a $4 million error made on his 1986 personal income tax return. The evidence was part of the testimony given by Brian Murphy, a former senior tax manager with the accounting firm of Peat Marwick Main & Co. who had done accounting work for some partnerships in which defendant participated. On direct examination the government elicited testimony that during Murphy's preparation of tax returns for Bilzerian's Hammermill-related partnerships, Bilzerian stated that the source of his contribution to the partnership was personal funds. The trial evidence indicated to the contrary that the money was borrowed.

On cross-examination, the defense sought to establish that the source of funds was irrelevant for tax purposes and that the tax returns filed on behalf of the partnerships, including the Bilzerian contribution, were correct. On redirect the government elicited the fact that defendant had underreported income from the Hammermill transaction on his personal tax return for 1986 by approximately $4 million.

The trial court stated since a partnership pays no income taxes, the testimony given on cross-examination regarding the accuracy of partnership returns created the impression that defendant had accurately reported his income from the Hammermill transaction. As such, the door had been opened to correct the false impression, including inquiry into defendant's personal tax returns.

Bilzerian asserts the evidence was inadmissable pursuant to Rules 403 and 404(b) of the Federal Rules of Evidence. Rule 404(b) prohibits the introduction of "other crimes, wrongs, or acts" for the purpose of demonstrating defendant's propensity to commit the charged crime. Fed.R.Evid. 404(b). The district court noted the evidence was not admitted for that improper purpose, but in order to rebut a false impression that had been created. Redirect may of course be used to rebut false impressions arising from cross-examination, and the scope of such redirect is within the trial court's broad discretion. United States v. Mang Sun Wong, 884 F.2d 1537, 1544 (2d Cir.1989), cert. denied, --- U.S. ----, 110 S.Ct. 1140, 107 L.Ed.2d 1045 (1990).

Rule 403 permits the court to exclude evidence if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury. The weighing of relevance under Rule 403 may be altered when a false impression is created by earlier testimony. That is, evidence whose probative value might not ordinarily outweigh its prejudicial effect if offered on direct examination is admissable to rebut testimony elicited on cross examination that created a false impression. United States v. Martinez, 775 F.2d 31, 37 (2d Cir.1985). Balancing relevance against prejudice under Rule 403 is in the hands of the trial court and will not be overturned unless its ruling is arbitrary or irrational. See United States v. Esdaille, 769 F.2d 104, 108 (2d Cir.), cert. denied, 474 U.S. 923, 106 S.Ct. 258, 88 L.Ed.2d 264 (1985).

The deficiency in Bilzerian's personal tax return was not relevant to the charge of conspiracy to defraud the IRS or to any other charge in the indictment. In addition, the testimony on cross examination related only to defendant's partnership tax return. His personal return at most had a tenuous connection to the issues at trial. Yet, the fact of his tax error was introduced without objection when he was cross-examined. In such context the evidence was admissable under Fed.R.Evid. 611(b) as probative of his veracity. The trial court was in the best position to judge whether a false impression was created by Murphy's cross-examination, and the decision to admit this evidence was within the trial court's discretion. Here, in addition, Judge Ward gave a limiting instruction stating that the contested evidence was to be considered only in evaluating Murphy's testimony regarding his preparation of the partnership returns. Thus, the rulings on the admissability of the tax error were proper.

A. Liability Under Sec. 10(b) and Rule 10b-5

Again, Bilzerian contends the securities fraud convictions cannot be sustained because any misstatements or omissions made, including the delays in disclosing his stockholdings, were not material. The securities fraud counts charged that in connection with the Cluett and Hammermill transactions defendant violated Sec. 10(b) of the Exchange Act, 15 U.S.C. Sec. 78j(b) (1988),1 and Rule 10b-5 of the regulations promulgated thereunder, 17 C.F.R. Sec. 240.10b-5 (1990)